larger downpayment or larger loan amt?

[Daniella Ortiz]

I am looking to decide whether or not I should pay a larger downpayment or get more financing and pay a smaller downpayment. I was reading on BP and it seems like people calculate the ROI as higher if they make a smaller downpayment. This doesn't make sense to me. For example:

house A: 100,000 that increases by 5,000.  If I paid 100k cash (no loan) and it increased by 5,000 than the increase is 5%.

house B: 100,000 that is financed by bank (80k) and I pay 20k. It increased 5,000 as well. I read on here that my ROI then is 25% but how is that so? I'd still be paying the bank interest on their loan and so my ROI isn't 25%...

Thank you all for your help!

Daniella Ortiz

Austin, Texas

[Joel Owens]

Your cash on cash is different.

If you pay all cash for a property then you have the net income after expenses as gross before tax profit.

If you put less down you can split out your cash among multiple properties. You also get higher returns off of your down payment as the money is working harder.

Example a client of mine can buy a retail strip center for 3 million cash at a 9 cap. So the property after expense pre-tax annually throws off 270,000 a year off of the 3 million investment.

OR

They can put down 25% which Is 750,000. Get an interest rated fixed in the 4's and a cap rate in the 8's.

The cash from the down payment will go into the mid double digits instead of being 9 percent. So to summarize leverage with a loan gives you the ability to stretch the cash further, increases returns, and spread out risk among a portfolio of properties.

Many other benefits and with leverage you have to buy right. That's where people get into trouble is not buying right.